Key Takeaways
- The right loan structure should align with a fund’s liquidity needs, repayment sources, and operational strategy.
- Subscription facilities and NAV facilities serve different purposes and rely on different collateral structures.
- Recurring liquidity pressures can signal that a short-term borrowing structure is no longer the right fit.
- Loan covenants, reporting obligations, and oversight requirements should match the fund’s practical operating needs.
- A well-structured facility supports the fund’s strategy instead of forcing unnecessary operational adjustments.
Zac Barnett is a Hinsdale, Illinois, attorney and co-founder of Fund Finance Partners, LLC, where he brings nearly two decades of experience in fund financing, private equity, and commercial lending. Throughout his career, he has advised major investment banks and fund sponsors on complex financing transactions and has developed a reputation for structuring practical fund finance solutions. Before co-founding Fund Finance Partners in 2019, he served as a partner at Mayer Brown, LLP, where he worked on some of the nation’s largest fund-financing matters. In addition to advising clients, he has contributed to the industry through writing and speaking engagements focused on financial structures, regulatory issues, and market developments.
His experience provides insight into how sponsors evaluate borrowing structures and identify facilities that align with a fund’s liquidity and operational needs.
Signs a Fund May Be Using the Wrong Type of Loan
Fund sponsors must decide whether to borrow. They also need to decide whether the facility matches the job it needs to do. In this context, the wrong type of loan means a structure that does not match how the fund expects to borrow, repay, and operate after closing.
The distinction becomes easier to see in plain language. Some fund loans rely mainly on uncalled investor commitments, while others rely more on the value of the fund’s investments. In practice, that often means the difference between subscription-style borrowing tied to uncalled capital and NAV-style borrowing tied to portfolio value. Those structures differ not just in name, but in collateral logic, repayment expectations, and use.
One warning sign appears when a fund uses a short-term loan to support a need that keeps returning. A subscription-style facility can work well when the fund expects near-term capital inflows from investors. It becomes a weaker fit when the sponsor keeps relying on it, because the real pressure comes from portfolio timing or recurring liquidity needs.
Another warning sign appears when the expected repayment source does not line up with the facility design. If a loan depends mainly on investor commitments, but the real pressure point sits in portfolio value, distributions, or exit timing, the structure may not match the problem. The same issue can arise in reverse if a portfolio-based facility must solve a need driven by capital-call timing.
A mismatch can also appear in the amount of oversight the facility brings. Reporting duties, valuation reviews, loan-to-value triggers, concentration limits, collateral tests, or cash-sweep controls can all be manageable in the right structure. They become harder to justify when the facility does not match the fund’s actual liquidity needs.
Lender type can affect the available options, but lender type is not the same as loan type. Banks, insurers, and similar financing sources may approach the same fund with different structures, timelines, and protections. A borrower can choose the right provider and still end up with the wrong facility design.
The next step is to test the structure against the fund’s expected use. Before settling on a facility, a sponsor should define the purpose of the borrowing, the likely repayment source, the level of post-closing oversight the fund can manage, and the downside case if conditions change. That exercise helps separate a structure that serves a clear business need from one that only looks workable at signing.
Fund counsel and other advisors can help with that analysis. Their role is to test whether the proposed facility solves the actual problem and whether it will remain workable once monitoring and compliance begin. That review matters most when two structures look acceptable at first glance. The real task is to identify which facility design matches the fund’s liquidity pattern.
A loan mismatch usually becomes clearer in use than at signing. Borrowing availability may narrow more quickly than expected once eligibility rules, valuation changes, or concentration limits take effect. Reporting demands or covenant mechanics may also burden the fund, even though those terms make more sense in a different facility.
Well-matched facilities should support the fund’s plan without forcing avoidable operating adjustments. When the borrowing tool fits the need, the sponsor has more room to manage liquidity, portfolio timing, and lender obligations without constant workarounds. One of the clearest warning signs is when the loan starts to shape the fund’s behavior more than the fund’s needs shape the loan.
FAQs
What does it mean for a fund to use the wrong type of loan?
A fund may be using the wrong type of loan when the facility structure does not align with the fund’s actual borrowing needs, repayment expectations, or operational strategy. In these situations, the financing tool may create unnecessary restrictions, inefficiencies, or liquidity pressure over time.
The mismatch often becomes noticeable when the loan begins shaping the fund’s behavior rather than supporting the fund’s intended investment and liquidity management objectives.
What is the difference between subscription facilities and NAV facilities?
Subscription facilities are generally secured by uncalled investor commitments and are commonly used to manage short-term liquidity before capital calls are made. These facilities are often designed for temporary borrowing needs tied to incoming investor capital.
NAV facilities, by contrast, rely more heavily on the value of the fund’s underlying portfolio investments. They are often used when liquidity needs are connected to portfolio performance, distributions, or exit timing rather than pending investor contributions.
What are common warning signs of a loan structure mismatch?
One common warning sign is when a fund repeatedly relies on a short-term borrowing structure to solve ongoing liquidity issues. Another is when the expected repayment source does not align with the collateral or design of the facility.
Sponsors may also experience operational strain from excessive reporting obligations, valuation reviews, covenant restrictions, or concentration limits that do not fit the fund’s actual liquidity patterns.
Why is lender selection different from choosing the right loan structure?
Different lenders may offer varying terms, timelines, and risk tolerances, but selecting a reputable lender does not automatically guarantee the facility itself is the right fit. The structure of the loan remains a separate and equally important consideration.
Even when working with experienced lenders, sponsors still need to evaluate whether the proposed facility aligns with their expected borrowing patterns, repayment sources, and operational flexibility.
How can fund sponsors evaluate whether a loan structure fits their needs?
Sponsors should begin by clearly defining the purpose of the borrowing, expected repayment timing, operational demands, and downside risks if market conditions change. This analysis helps determine whether the structure can remain workable after closing.
Fund counsel and financial advisors can also help assess whether a facility’s reporting obligations, collateral requirements, and liquidity mechanics properly support the fund’s broader strategy and long-term operational goals.
About Zac Barnett
Zac Barnett is the co-founder of Fund Finance Partners, LLC, and a lawyer with extensive experience in fund financing, private equity, and commercial lending. Based in Hinsdale, Illinois, he previously served as a partner at Mayer Brown, LLP, where he worked on complex fund-financing transactions. He has also contributed to the industry through articles, speaking engagements, and participation in organizations such as the Fund Finance Association.